Invoice Discounting

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What is Invoice Discounting?

Invoice finance allows funds to be drawn from invoices almost as soon as they are raised. A company who uses invoice finance does not have to wait 30-90 days for payment, meaning their cash flow is greatly improved.

When the invoice is raised, a set percentage of the money due, up to 95%, is released to you immediately. The remainder is released when the invoice is settled, minus a small agreed percentage for the lender.

As expert invoice discounting brokers, our advisors are on hand to secure the best terms for you. Our service is totally unbiased – we negotiate the best deal for you, not for the lender.

Read on below to find out more or fill in the form to talk to an expert.

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How Does it Work?

Invoice discounting tends to be most suited to larger firms and is designed to fund their entire sales ledger. Facilities are often set up on a confidential basis, meaning customers are unaware that it is being used.

Invoice discounting facilities allow the borrower to handle their own credit control, meaning you continue to deal with your own creditors. This can be important when trying to maintain a strong relationship, or when carefully managing a slight payment issue.

Lenders will be keen to understand the creditworthiness of the customers, as they will be less involved in the payment process. Due to the lack of control from the bank’s side, they will want to ensure the risk of running into issues later is as small as possible.

When looking to take out invoice financing, the lender will also look into your credit control systems. Without robust credit control, the risk of late or non-payment increases. For this reason, smaller, or new companies may be encouraged to proceed down the invoice factoring route.

Is Invoice Discounting Right For My Business?

If your business invoices clients on credit terms and has established credit control procedures in place, then this could be for you. If cash flow holds back your otherwise profitable business. you could benefit by investigating invoice finance.

Companies with a turnover in excess of £250,000 tend to be most suited to confidential invoice discounting.

By receiving payment almost as soon as your invoice is raised, everything from payroll to paying suppliers becomes simple. The revolving funding line is designed to grow with your business and is naturally in tune with your busy periods.

When compared to other business funding options such as overdrafts, business loans and peer to peer lending, this type of finance is often the most flexible option. Our lenders offer a 100% confidential service, meaning your customers will not know that you are using the facility.

Invoice Discounting in Practice

AAA Fabrications is looking to improve their cash flow after taking on a large contract with a new customer. As such, the Managing Director, Fred, has taken out a confidential invoice discounting facility with the lender.

Under the terms of their agreement, the lender will release 80% of each invoice immediately. This is known as the ‘advance percentage’ or ‘prepayment percentage’.

The facility is live, and AAA Fabrications has issued their first invoice for £20,000, meaning £16,000 is advanced by the lender immediately. In order to secure the advance, Fred must upload the invoice to the lender’s online portal, which he does.

30 days later, the customer settles the invoice using the bank details on the invoice. The account is a trust account, which the lender holds for the client, in the client’s name. Fred’s customer will be unaware that the account isn’t the normal business account.

Once the invoice is paid, the lender would then pay the rest of the money over to AAA Fabrications, minus any fees and interest. The fees payable would be the discount fee and any service charge, as per the agreement.

In this example, Fred would expect to pay around £500-£600 for the money, meaning the remaining £3,500-£3,600 would be paid to him.

The Benefits of Invoice Discounting

Invoice discounting can have a number of benefits for businesses, including the following:

  • This type of borrowing is often far more cost-effective than other funding options for cash flow management.
  • Business growth can often be accelerated due to improved cash flow.
  • Your cash flow will improve as you will have almost instant access to the funds due, without having to wait for payment from the customer.
  • Invoice discounting can be completely confidential, meaning your customers will be unaware you are using it.
  • You manage your own sales ledger, maintaining credit control processes and keeping control in-house.
  • The products tend to be very flexible. As your business grows, the cash available in your facility will grow alongside it.
  • Improved cash flow will result in you being able to pay your creditors sooner, often meaning you can negotiate price reductions as a result.

How Does Invoice Discount Pricing Work?

The pricing of facilities can be broken down into two parts, they are the following:-

  • Service charge: The service charge is an annual cost of managing your facility. The fee is charged as a percentage of your company turnover. This fee is usually between 0.25%-2.5%.
  • Discount charge: The discount charge is the fee charged for funding each invoice. This fee tends to be between 0.5-3% of the total invoice amount.
  • What Can Affect the Cost of My Facility?

    The rates charged will depend on a number of factors. The main points are the turnover of your business, the funding level required, the quality and performance of your debtor book and the payment terms that you have agreed.

    Can You Offer Invoice Discounting if I’ve Got Adverse Credit?

    Yes, funding is available for those with adverse credit. Invoice finance can actually be an excellent option for rebuilding your credit profile due to the positive cash flow position that is created when you take out a facility.

    Who Can Apply?

    We can provide funding to UK businesses, whether their customer base is UK based or not.

    If you’re not sure if you’ll qualify for funding, we are happy to run through the options available to you over the phone in a free consultation with a commercial finance expert.

    What are the Risks?

    The biggest danger when taking out invoice finance is that your company becomes heavily reliant on it. It should be a solution to ease your cash flow, creating a buffer for you, rather than becoming the norm.

    The lending risk is actually fairly small as you’re only borrowing against an invoice that is due to be paid. The risk can be reduced further by taking out bad debt protection in the event of a customer failing to pay.

    Call Us Now Or Enquire Online

    At ABC Finance Ltd, we know the invoice finance market fully and have relationships with all the top lenders. By working with us, you can access the whole market through one simple, quick enquiry.

    We manage the entire process and you can leave the whole thing to us while we negotiate the most suitable terms for you. Enquire online now or call us on 01922 620008 to get a free personalised invoice finance quote.

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